The excitement over digital transformation at HDFC Bank is palpable. With the Indian banking industry facing new challenges and additional competition from new banks, digitisation is a necessity rather an option. A variety of strategic approaches and operational initiatives are being undertaken as banks compete in this environment. HDFC Bank, India’s second largest private sector bank,intends to be well placed to face these challenges by adopting customer-centric technology, a platform-based approach, efficient processes, and new innovations.

The Challenge

The Indian banking industry is on the cusp of a revolution with new competition emerging. Recently,the Reserve Bank of India granted in principle approval to 11 “payment banks” that can accept small deposits but are not allowed to lend. The key change they can be expected to bring to the industry is a revolution in the mobile and digital payments space through advanced technology innovations and agility in operations.  In addition, various e-commerce companies and fintech players have emerged, presenting further new challenges to in cumbents.

Head of operations at HDFC Bank,BhaveshZaveri, notes the new competition commenting that there is an emerging trend of non-bank players offering products that were traditionally the forte of commercial banks.

“These new players are leveraging digital technologies effectively and innovatively, appealing to a large spectrum of the market segment. However, new-age banks like ours are well aware of such challenges and are equipped to retain and increase our dominance in these digital banking are as as well,” he stated.

Zaveri also noted that whoever owns the customer will continue to drive pricing and product acceptance. Hence strategies have to be realigned as well to retain customer relationships. 

“We have taken various transformational and disruptive steps in recent times to achieve this goal,” he stated.

Transforming the bank into a digital bank requires a consistent strategic and operational focus, putting the customer at the centre of the stage, something that HDFC is striving to achieve through various customer-centric and channel initiatives.

“We don’t dilute our philosophy of being customer-centric and being able to engage more with our customers. Banking has to be digital across all touch points,” stressed Nitin Chugh, Head of Digital Banking at HDFC. 

The Solution 

Reading the writing on the wall, leaders in the industry such as HDFC Bank have already started more aggressively innovating digital products and servicesfor customers. 

The bank is looking to increase its business through two key strategic approaches—driving digital channel adoption by moving from physical channels to e-channels, and acquiring new customers through innovations in its product and service capabilities. The greater the shift the bank is able to make, the more it hopes to be able to reduce its costs.

The bank has acted proactively and has launched various digital initiatives including“Chillr”, which enables peer-to-peer payments; and “Payzapp”, its new mobile banking app that provides the eco system for customers to pay with one click and also shop online.

The bank also claims to be the first bank in the country to offer trade finance on mobile. It also recently launched Apple watch type applications with geo-locational offers, even before the Apple Watch was launched in the country. 

“Anything that is thought or imagined by the industry (from the disintermediation point of view), we have also thought of, and are either already offering it, or it is in pipeline. We are constantly scanning the market for new developments,”Chugh said.

The bank has strategically implemented differentiated and varied innovative products and servicesto cater to different market segments in the country. For example, it implemented “missed call banking” where in a customer can give a “missed” callsignal (i.e., call a pre-arranged number, wait for the ringing tone and hang up) from a registered mobile number to the bank’s application and automatically receive account balance details through SMS. This essentially free service is seeing strong adoption in the rural market. In addition,the bank is offering unique products such as 10-second loans for its preapproved customers, and 30-minute loans for others. HDFC is looking to target all markets with all products and to digitally enable them. This, it hopes, will give the bank traction in both semi-urban and rural areas. 

For social media banking,HDFC Bank’s digital channel strategy has been judicious. It has adopted a “wait and watch” policy despite the fact that others in the country have implemented social media banking well ahead of them, the reason being to ensure that the social media services are not vulnerable to any security concerns.

With relatively low branch penetration in India compared to other countries, the focus on brick-and-mortar branches is expected to remain strong. Despite the expansion of digital channels and the increase in e-channel transaction volumes (Figures 1 and 2), HDFC continues to grow branches at a notable rate, highlighting their role in customer acquisition and service capabilities. As Chugh points out, HDFC intends to continue to expand its branches, but these will be digitally enabled branches.

Figure 1: Mobile Channel Transaction Volumes and Values of HDFC Bank, 2012–2015

Figure 2: Growth in Digital Transactions at HDFC Bank, 2013–2015

HDFC has also continued to deploy ATMs with ATMs out numbering branches by three to one (Figure 3).This is to encourage self-service banking with the aim of shifting transactions away from high-cost branches.Currently, HDFC Bank has an extensive network of 4,014 branches and 11,766 ATMs throughout India.

Figure 3: Branch and ATM Growth of HDFC Bank, 2012–2015

Technology enablement

Digital enablement and ensuring its adoption requires multi-pronged efforts. Technology change needs to be accompanied by a culture change within the organization. Along with this, strong efforts are needed to have well-equipped front-end staff,as well as training to successfully optimize digital adoption. Customers who are less digitally adept require efforts from the bank to educate and guide them through the transactions.

HDFC has its own unique approach to this.

“People follow the SMAC process—social, mobile, analytics, and cloud—as a route for innovation,” Chugh pointed out.“For us, much more important than this is reengineering. We have to stitch everything together in such a way that computing is straight through and has a good user interface.”

He added that the bank is looking at meaningful, replicable, sustainable, platform-based innovation, and not a “sliced-out” vision of innovation.

The bank has been an early adopter of technology, which is one of the key drivers in the bank’s growth and competitive differentiation.  According to Chugh, HDFC built its foundation on trust and customer centricity implementing an analytics layer, supported by data warehouses, and rich bank-wide customer relationship management (CRM) technology and processes. HDFC was an early investor in data warehouses and over the years has added layers including CRM, risk analytics, and market analytics that enable a better understanding of the customer. The bank’s analytics capability and transactional engagement with customers gives it insight into the preferences of its customers.

Chugh stated that the bank is “transforming on the go” taking engagement to the next level by adding more digital levels.

“The focus is towards offering service through preferred channels and devices in a way that the customer wants to see it,” he explained,“and provide straight through processing (STP) at the back end to enable instant response and improved experience.”

HDFC has been targeting improved STP, which delivers significant operational advantages such as lower turnaround and response time, and efficiency in transactions while reducing paperwork and human resource inputs. One key advantage of automated processes is reduction in customer complaints, resulting in improved customer experience.

“The fact is that today's customer value chain starts with business, is facilitated by operations, and driven by technology.  We have been continuously reinvesting in our technology platform to keep it flexible, cutting-edge, and product-oriented,” Zaveri explained.

While the bank is being proactive and transformational, it is also being cautious in implementing certain emerging technologies such as cloud.

“We are looking at new opportunities such as cloud for implementation in non-mission-critical areas to build efficiency and cost advantage,” Zaveri explained.

The Impact

The digital channel strategy has shown promising results.Today,as a result of the various digitisation initiatives by the bank,63% ofthe bank’s transactions are from mobile and internet channels(Figure 2).Strong growth in digital enablement has helped the bank to reduce its operating costs, resulting in a steady decline in the cost-to-income ratio. The bank is believed to have increased its customer base to 32 million in the financial year 2014/15, following an addition of about 2 million customers last year, including new accounts opened under financial inclusion initiatives.

Zaveri explained that the bank has been aggressively pursuing digital initiatives not only in retail, but in wholesale banking as well. In order to provide a consistent experience to its customers across business lines, the bank has recently replicated some of its retail banking digital features for corporate banking. It has introduced products such as bill payments to corporate banking, and trade finance on the internet.  Trade finance on mobile phones is a recent,notable success story, as HDFC is the first in India to launch this.

For many banks in India,margins have been under pressure recently. However, HDFC has exhibited strong financials (Figure 4) and has managed to keep a lid on its cost–income ratio (Figure 5).

Fig 4. Comparative Return on Assets of Indian Banks, 2013–2015

Fig 5. Income Growth of HDFC Bank, 2012–2015

Expansion of the bank’s distribution network and the resulting customer acquisition has helped the bank to witness a steady growth in income. The bank currently has only 12% of its transactions in branches compared to 21% through ATMs and 63% via the internet and mobile phones, indicating its success in shifting transactions from expensive brick and mortar to digital. A strong growth in retail business was seen in the last financial year with retail deposits growing by 23% and retail advances growing by 17%.

Enabling automation and STP in transactions has also facilitated error reduction and improved margins for the bank. Net profit margin improved from 17% to 18% in the last  financial year while return on assets has steadily improved over the last few years to give the bank a leading position in the industry today.

“The bank's focus on extending its products on digital platforms will only grow in the near future. Customer experience management is at the center of such initiatives to make these inclusive offerings and not individual products,”Zaveri affirmed. “With such initiatives on product fronts, we will continue to drive various STP and other operational excellence projects to keep a handle on our costs and retain our agility to support new business initiatives.”

Going forward

With its plans of continual expansion of digital channel services andthe physical channel network, and its offering of all products in all branches, the bank is ensuring that it is able to optimize its distribution network. And with technology integration at the backend coupled with digital enablement of processes, the bank hopes to achieve notable customer centricity to maintain its competitive edgeeven with the emerging new players in the industry.

“HDFC Bank will continue to be ahead of the curve in using technology in the Indian market. We intend to use technology as a differentiator for customer experience and to substantially reduce costs,” said Zaveri.

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Keywords:Customer Centricity, Digitisation, HDFC Bank, India, Mobile, Payments, Digital Channel, E-channel, Social Media Banking, Brick And Mortar, Internet Banking, CRM, Analytics, Straight Through Processing, Trade Finance, Chillr, Payzapp